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Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

Published online by Cambridge University Press:  03 May 2017

Iftekhar Hasan ,
Chun Keung Hoi ,
Qiang Wu  and
Hao Zhang
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Abstract

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We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 1017 - 1047
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

The paper benefited greatly from valuable comments and suggestions from an anonymous referee and Paul Malatesta (the editor). We are grateful for helpful comments from colleagues at our respective institutions. Hoi and Zhang thank the Saunders College of Business at RIT for summer research support. Wu thanks the Lally School of Management at RPI for research support through an A. C. Lawrence Research Fellowship.

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